Hovnanian's Debt Is Drag as Housing Heals

Builder Still Feels Effect of Market's Fall Even as Rivals Start to Buy Again; Founder's Death Comes as Blow

By

James R. Hagerty and

Dawn Wotapka

Updated Sept. 28, 2009 12:01 a.m. ET

As the U.S. housing market shows tentative signs of healing, some of the nation's biggest home builders are starting to acquire land again in preparation for better times. But one builder is hobbled going into this land grab: Hovnanian Enterprises Inc.

ENLARGE

Founder Kevork Hovnanian, who died last week at 86, is shown at left at the builder's 2001 transfer to the NYSE.
Associated Press

The nation's sixth-largest home builder in terms of the number of sales completed last year, Hovnanian is still trying to recover from its post-boom malaise. Late last week, the company suffered another blow with the death of its founder and chairman, Kevork Hovnanian, 86 years old. His son, Ara, 52, remains chief executive, a post he has held since 1997.

A spokesman declined to comment on when a new chairman will be named or how the death might affect the family's controlling stake in the company.

Hovnanian took on more debt and made more acquisitions near the top of the housing bubble than most big rivals.

Now, the Red Bank, N.J., company is struggling to return to profitability in time to pay down debt and take advantage of potential bargains as banks unload foreclosed land.

"The company is caught in a tough spot," said David Goldberg, an analyst at UBS Investment Bank in New York.

Asked to comment on the company's financial strains, a Hovnanian spokesman said that "we have been in business for 50 years and successfully navigated through numerous housing cycles."

Early last week, Hovnanian sought to ease its debt burden by offering to repurchase as much as $759 million of debt that was due to be repaid over the next eight years. To finance the purchases, the company is likely to issue new bonds maturing in eight to 10 years, said Vincent Foley, an analyst at Barclays Capital in New York.

That would leave the company's debt at high levels but allow it to delay repayments of the bulk of its debt that otherwise would have occurred in 2013.

The debt restructuring "buys them a lot more time and some flexibility," said Ivy Zelman, chief executive of Zelman & Associates, a research firm. But Hovnanian still "won't have nearly as much dry powder to put to work" on land purchases compared to most of its big rivals, she said.

As of July 31, the end of its fiscal third quarter, Hovnanian's net debt stood at 109% of total capital, far above the average of 26% for the 12 big home builders tracked by Zelman & Associates.

ENLARGE

Sales at a Hovnanian tower in Jersey City were hurt by Wall Street cutbacks.
The Wall Street Journal

Other builders are boasting of their ability to seize on land bargains. Lennar Corp. said it spent $77 million to buy lots in Florida, Texas, California and elsewhere in its fiscal third quarter ended Aug. 31, up from $58 million in the prior three months.

Lennar also invested $140 million for a 15% stake in a California-based land-development company, the purchase of several communities previously owned by that company, and the settlement and release of any claims.

Despite the spending, Lennar's net debt stands at about 36% of capital.

Hovnanian spent $37 million on land in its latest quarter and has insisted it will be able to purchase more land as opportunities arise, partly by teaming up with financial partners.

Some of its past purchases were ill-timed. Hovnanian made six acquisitions of smaller builders between November 2003 and April 2006. Four were in Florida, now widely considered to be the nation's weakest housing market.

For instance, in August 2005 Hovnanian bought First Home Builders of Florida, which operated in the Cape Coral-Fort Myers area of southwestern Florida, on undisclosed terms.

At the time, Hovnanian said population growth and a healthy job market "make Florida an attractive market for the foreseeable future."

Within a few months, home sales in Florida began to stall. Since peaking in mid-2006, prices in the Cape Coral-Fort Myers area have plunged 50%, according to First American CoreLogic. In 2007, Hovnanian announced a write-off of $107.7 million of assets related to the Fort Myers operations.

In another investment, Hovnanian began construction in 2007 on its biggest tower, a 48-story condominium project called 77 Hudson in Jersey City, N.J., near Manhattan. A sharp drop in Wall Street employment has made it harder to find buyers for the tower's 420 units, according to real-estate agents.

"It's the right building at the wrong time," said David Bartz, an agent who does business in Jersey City, where many condo buildings sprouted during the boom.

Hovnanian was founded in 1959 by the elder Mr. Hovnanian and three brothers, ethnic Armenians who immigrated to the U.S. from Iraq.

The company initially focused on New Jersey and later branched out to neighboring states and Florida. For a time, it built mainly low-cost, cookie-cutter developments.

Hovnanian now builds homes in 18 states, up from seven in the late 1990s. While some builders focus on either the high or low end of the market, Hovnanian tries to be a jack of all trades, with houses at most price points. It also builds communities for older people.

The company has reported losses of more than $2.3 billion over the past three years. Daniel Oppenheim, an analyst at Credit Suisse, projects a further loss of $305 million for the year ending Oct 31, 2010.

Hovnanian has responded to the red ink by slashing its work force to 1,891 in July from 6,870 three years earlier. Hovnanian's stock-market value has plunged to about $314 million from a peak of about $4.8 billion in July 2005.

Despite its troubles, UBS's Mr. Goldberg cautions investors against writing off Hovnanian. "It's not clear how this is going to play out," he said.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.